The 17.6 Year Stock Market Cycle

Daily fundamental and technical analysis of the US stock market by full time hedge fund manager and options guru, Master Jason Ng (owner and author of ). The chart below shows the buy/sell calls produced by a strategy based on using a weighted average of 6-month market forecasts. I am adding a stock market trading strategy to my monthly blog posts, a Buy-Sell-Hold model for the U.S. stock market based on a weighted average of my forecasts from prior months. The solution I have come up with is to develop a stock market trading strategy based on a statistically weighted average of my 6 month stock market forecasts from prior months, not the current prediction. My models had expected typical seasonal market weakness, but not the extra downdraft of international finance fears.

In late August through September the stock market was panicked by fears of things that don’t have large real dollars and cents impact on the U.S. economy (financial uncertainty in China and Greece along with weak world oil prices). Then, just like the not-at-all-real goblins of Halloween, in October those extreme fears fell away and the market staged a sharp recovery. Over the long haul my experience-based stock market forecasting results tend to be pretty good.

But, this blog and my stock market prediction models focus on the coming six months, not the next few weeks. If my macroeconomic model is to be believed, it says that the market is over reacting to international news and things should start to get better over the next few months. My forecasting models totally missed expecting the mid-August market panic / correction. The prediction models had been expecting a sub-par market over the summer months, reflecting the statistical fact that stock markets tend to be weak over the summer.

But, no way did the models foresee the abrupt market correction that actually, and painfully, happened. The answer is that the fears that moved the market (high valuations, economic weakness in China, low commodity prices, and a weak oil market) are not the basic economic forces that typically have a lasting and remarkably predictable longer term impact on U.S. stock prices.

In short, the models say that the market over-reacted to bad news that really is not that important to U.S. stock prices. If history is a guide, the positive economic fundamentals will regain their importance fairly soon and the market will recover. As shown in the chart above, the U.S. stock market (measured by the ValueLine Arithmetic Index) has done pretty much what my models had expected for the past year or so. Actually, my forecasts have matched the market unusually well.